Although politicians, central bankers and financial markets would like to believe, and have us believe that the global economic crisis is over, at least in the United States, now it bounces back dramatically, and reminds us that, since 2008, the solution to challenges have been postponed by transferring private debt to public debt. This is particularly true in the United States for three very specific reasons:
The absence of a Prime Minister leads to institutional deadlock, when the majority in the U.S. House of Representatives is not the same political color as the President. In France, for example, in such a case, the budget would be presented, voted and implemented under the responsibility of the Prime Minister, representing the parliamentary majority; the president would not have a say and the country would continue to function.
The U.S. federal government’s budget execution which begins on October 1, is not automatically renewed unless it is approved by Congress, contrary to what happens in most other democracies. However, Republicans in the House of Representatives, whose reelection depends on the support of extremists from their own party (the Tea Party), refuse to pass a budget that funds Obama’s healthcare reforms enacted in 2010 and one aspect of which came into force on 1 October 2013. For lack of agreement between the President and Congress, public services were cut back since then; 900,000 federal employees, 43% exactly, are out of work without pay. This is the shutdown; its cost is immediately huge: a one-week shutdown takes away $8 billion from US production, and also has a negative impact on growth (0.2 to 0.5 percentage point), according to estimates.
Finally, since 1917, in the United States, unlike most other countries, a statutorily imposed debt ceiling has been in effect, which cannot be increased without Congress’s approval. Since then this ceiling has been increased dozens of times. If the debt ceiling (which now stands at $16.7 trillion) increase is not passed by 17 October 2013, the United States will default on its debt payments because the government will run low on cash very quickly (only US$30 billion will be left). Financial markets will quickly anticipate a US default, which would have far reaching effects on the global financial system, worse consequences than the shutdown. Europe will not escape unscathed.
In order to win this trial of strength, the House of Representatives, controlled by the Republicans, has voted partial and temporary measures to allow certain services to work (nuclear weapons security, intelligence services, border police, social allowances to those in greatest need, FDA, weather services, aid to schools, schooling of children from poor families, retroactive payment of government workers); they were rejected by the Senate and the White House, who do not intend to make major concessions on health and prefer a confrontation scenario. Pending a solution, and to cushion the shock, the Fed maintains the pace with its monthly $85 billion quantitative easing program: another artificial funding source, which will have to be repaid one day. Thus everything is possible, although it is more likely that Republicans will soon give up, not wanting to be held responsible for the paralysis of the country. When they will do so, we will breathe, and will believe once again, that the crisis is over, its postponement in fact, which will become even heavier…
j@attali.com